First-time buyers now can get a mortgage with 3% down

First-time buyers need only 3% down for Fannie, Freddie loans

By Dina ElBoghdady, Washington Post

December 9, 2014

Photo: ISAAC BREKKEN, STR / New York Times

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Melvin Watt, head of the Federal Housing Financing Agency, shown at a recent conference, <137>speaks during the Mortgage Bankers Association conference in Las Vegas, Oct. 20, 2014. Watt <137>says <137>Dec. 8 that <137>he wants to lure more first-time homebuyers with a program that will offer mortgages with a down payment of as little as 3 percent of the purchase price. less

A customer fills out a mortgage application. Fannie and Freddie soon will allow for mortgages with a down payment as low as 3 percent — instead of the 5 percent currently required — as long as one of the borrowers on the mortgage has not owned a primary residence within the past three years. less

A customer fills out a mortgage application. Fannie and Freddie soon will allow for mortgages with a down payment as low as 3 percent — instead of the 5 percent currently required — as long as one of the ... more

Photo: STEVEN E. FRISCHLING / BLOOMBERG NEWS

First-time buyers now can get a mortgage with 3% down

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WASHINGTON — Some first-time homebuyers will get a break on their down payments through programs announced Monday by mortgage giants Fannie Mae and Freddie Mac as the firms try to jump-start the housing market by making it easier for more borrowers to qualify for a mortgage.

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Fannie and Freddie soon will allow for mortgages with a down payment as low as 3 percent — instead of the 5 percent currently required — as long as one of the borrowers on the mortgage has not owned a primary residence within the past three years. The changes take effect Saturday at Fannie and March 23 at Freddie.

In a call with reporters Monday, Fannie and Freddie officials said it’s too early to tell how many borrowers will take advantage of the programs. But they also said they expect many lenders to offer them. The Federal Housing Finance Agency, which oversees both companies, said these low-down-payment loans probably will be a small share of both firms’ businesses.

Fannie and Freddie do not make loans. They buy them from lenders, package them into securities and sell them to investors. For a fee, they guarantee the mortgages and pay investors if the loans default.

The down payment changes mark the latest effort by government regulators to help first-time buyers who have been shut out of the housing market in recent years. Since the market unraveled, lenders have been turning away potential buyers by demanding unusually high credit scores and imposing tough standards on government-backed loans, including those of Fannie and Freddie.

The industry, forced by regulators to buy back billions of dollars in loans after the housing bust, has said it’s trying to insulate itself from more financial penalties and lawsuits. It repeatedly ignored pleas from the White House and government regulators to ease lending criteria.

Fannie, Freddie and their regulator responded by taking a number of steps to address lender concerns. They also agreed to clarify the circumstances under which lenders are required to buy back loans. Some lenders (most notably Bank of America) have said in the past that these changes are not likely to encourage them to offer low-down-payment loans. On Monday, Bank of America said it is re-evaluating now that program details have been released.

Fannie and Freddie say the feedback they’re receiving suggests that many lenders they work with will embrace the new 3 percent down options, and industry experts agree.

“I’m confident that the majority of the lending community is going to take part in these programs,” said David Stevens, chief executive of the Mortgage Bankers Association. “They’re more confident about the risks they face in extending these loans.”

Some Republican lawmakers, including Rep. Jeb Hensarling, R-Texas, have said the Fannie and Freddie low-down-payment programs are a return to the lax lending standards that contributed to the foreclosure crisis. But Fannie and Freddie officials insist they are not.

On Monday, company officials emphasized they will buy only plain-vanilla, fixed-rate mortgages belonging to borrowers who can document their ability to repay a mortgage.

“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” Mel Watt, director of the Federal Housing Finance Agency, said in a statement.

Fannie and Freddie only buy loans with less than 20 percent down if they carry private mortgage insurance, so even if some of the 3 percent-down loans were to default, taxpayers are not in line to take the first hit. The mortgage insurance companies are.

Both Fannie and Freddie previously had accepted mortgages with a 3 percent down payment. But Fannie stopped purchasing them in late 2013 unless the loans were made through state and local housing finance agencies. Timothy Mayopoulos, Fannie’s chief executive, has said his company’s long experience with these loans shows they perform well.

Under the new plan, Fannie also will allow borrowers with up to 97 percent equity in their homes to refinance. Previously, it only allowed refinances for people with 95 percent equity. It also is allowing limited cash-out refinances so borrowers can pull enough cash out to help pay for the closing costs. The amount of cash would be limited to 2 percent of the loan amount, or $2,000, whichever is less.

Freddie, Fannie’s smaller rival, said it has not purchased 3 percent down payment loans in years, which is why it will take longer to get its program up and running. To qualify, Freddie is requiring that homebuyers participate in a borrower education program first.